Results

• Gadang reported a net profit of RM10.1m for its 3QFY20 result as compared to a net profit of RM10.7m in its 2QFY20 and RM13.4m for its 3QFY19.

• Stronger QoQ earnings. The Group delivered a higher revenue of RM212.1m (+7%) and profit before tax (PBT) of RM16.8m (+11%) thanks to minimal increase of costs of good sold and lower expenses (+3% & -45% respectively). We witnessed EBIT up substantially to RM19.9m (+26%) from RM15.8m. In addition, EBIT margin and net profit margin hold relatively well as 9.4%/4.80% respectively. However, higher tax expenses (+65%) caused the net profit slide to RM10.1m from RM10.7m.

• Disappointing YoY performance. Revenue increased mildly by 3% but the increase in administration expenses and operating expenses to RM11m/RM5.5m (+37%/44%) offset the operating profit to RM19.9m (-15%). To make matter worse, the elevation of finance costs (+75%) as well as widening loss for joint venture (+425%) eroded the bottom line radically to RM10.1m (-25%).

• 9MFY20 exceeds expectations. The Group recorded RM557.4m revenue which increased 11% YoY. However, operating profit slumped to RM57.8m, -16% mainly because of higher cost incurred. As a result, 9 months net profit fell to RM35.7m, which tumbled 24%. We deem the Group’s 9MFY20 result above our/consensus expectations, matching 94%/80% of full year net earnings forecast. However, we anticipate tough quarter ahead as construction will be heavily impacted by stringent SOP rules such as social distancing and health screening of foreign workers.

• Encouraging property sector. Property segment contributed positively during 3QFY20 as the segment achieved RM60m (+68% YoY) sales and RM14.4m profit (+183%) to the group’s bottom line on the back of favourable sales from Elegan @ Taman Putra Perdana, Puchong which was launched in August 2019.

Comment

• Venturing into overseas market. We deem Gadang will be facing a very difficult period in the residual year as order book replenishment is at risk, coupled with invisible policy guidance, and construction downcycle to persist. As the local market is full of uncertainty, Gadang acquired a Singapore earthwork company (mainly in piling) to venture into overseas market in December 2019, which is in line with the management’s guidance to look beyond Malaysia. The move is favourable as Singapore has a few public construction infrastructure plans such as the Integrated Waste Management, Changi Airport Terminal 5, Jurong Region MRT Line and Cross Island MRT Line. We are confident that Gadang will secure some public construction projects in Singapore based on its commendable track records in the past.
• Aligning property launching with market demand. The unsold units of residential houses for national level rose dramatically to 57,000 units in 2019, +11.2% rise in volume and +16.1% in terms of value. The bulk of unsold units comprised of high-rise units which poses a bumpy road for property developers. We believe Gadang could mitigate the supply glut issue by launching some demanding residential properties, for instance, landed houses in Puchong, which is strategically located within Klang Valley. Such project is expected to remain resilient along the year. Still, the disruptive economic impact of COVID-19 is yet to be seen till few months down the road with severe impacts to construction and property sectors as a result of rising unemployment, mounting household debt, and unquantifiable “new normal” side effect to our country. Having said that, Gadang boasts RM887m order book and RM107.8m unbilled sales which will let the Group busy for the next 2 years as well as buffer the stagnant property market.

Earnings Outlook/Revision

• We upgrade our FY20-21F net earnings forecasts by 15.1% and 27% as Gadang has received approval earlier than May CY2020 to resume construction progress, contributing positively for its 4QFY2020 coupled with its impressive 3QFY2020 property sales to offset potential sluggish in 4QFY2020. However, we expect a slew of uncertainties emerges with unforeseeable 2HCY2020 outlook such as potential city lockdown for 2nd wave of COVID-19.

Valuation & Recommendation

• Upgrade to BUY from HOLD with a higher target price of RM0.48 (from RM0.42) following our earnings upgrade. Our revised target price is pegged at unchanged PE multiple of 8x FY21F EPS amid challenging construction and property outlooks.

Source: JF Apex Securities Research - 15 May 2020